BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2012-2013 Regular Session


          SB 6 (Lieu)
          As Amended January 15, 2013
          Hearing Date: April 2, 2013
          Fiscal: No
          Urgency: Yes
          RD


                                        SUBJECT
                                           
                                      Business

                                      DESCRIPTION  

          This urgency bill would re-enact repealed provisions of  
          California's Uniform Commercial Code, relating to the rights  
          that certain licensees take under a nonexclusive license where a  
          security interest exists in a general intangible, as specified.   
          Those provisions previously sunset on January 1, 2013.  

          This bill would state the intent of the Legislature to negate  
          the effect of the above sunset, and include an operative date of  
          January 1, 2013.  This bill would sunset on January 1, 2015.

                                      BACKGROUND  

          Article 9 of the Uniform Commercial Code (UCC) covers security  
          interests in personal property.  It was rewritten and modernized  
          by the Uniform Law Commission (ULC, formerly the National  
          Conference of Commissioners on Uniform State Laws, or NCCUSL) in  
          the late 1990s and in the process the ULC addressed security  
          interests in general intangible property (such as intellectual  
          property).  Every state has adopted Article 9 as revised, and  
          California's revised Article 9 became effective on July 1, 2001.  
           (See AB 45 (Sher, Ch. 991, Stats. 1999).)

          As a whole, the new Article 9 simplifies and clarifies the rules  
          for creation, perfection, priority and enforcement of a security  
          interest.  More specific to this bill, the 1999 revisions to  
          Article 9 of the UCC created rights for licensees of general  
          intangibles such as intellectual property comparable to the  
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          rights of buyers of goods in the ordinary course of business.   
          (U. Com. Code Sec. 9321.)  

          At the time that California considered adoption of the revised  
          Article 9, the Directors Guild of America, Inc. and the Screen  
          Actors Guild expressed concerns about how the proposed revision  
          to Section 9321 would affect their operations.  As reflected in  
          the Senate Judiciary Committee analysis of the 1999 revisions:

            The Screen Actors Guild is concerned about the  
            application of this rule to their industry.  They say  
            that with the rapidly developing technology in their  
            industry, it is difficult for them at this time to forego  
            the value of a perfected security interest from a  
            licensee, even if the license is a nonexclusive license.   
            Example is given of an actor's residuals from movie  
            rights to a film rented out by Blockbuster Video, a  
            nonexclusive licensee.  Technology may develop such that  
            they should be able to enforce their security interest  
            against a nonexclusive licensee they say, in three years  
            or so, and therefore suggest that this particular  
            provision sunset in three years, subject to reenactment.

            The drafters of Article 9 resist this vigorously.  They  
            state that a nonexclusive licensee will not "take free"  
            of a security interest created by the licensor to its  
            sublicensor if the first license was "exclusive." 

          (Sen. Judiciary Com., analysis of SB 45 (1999-2000 Reg.  
          Session), April 13, 1999, p. 10.)  

          While the ULC assured them at the time that the then-proposed  
          language of Section 9321 would not have a negative impact in  
          practice, the groups asked for time to evaluate the impact of  
          the new Section 9321 on their actual operations.  The  
          Legislature then agreed to limit the operative effect of the new  
          Section 9321 by including a sunset date of January 1, 2004.   
          That original sunset date was subsequently extended three times,  
          most recently to January 1, 2013.  However, no bill was  
          introduced in the 2011-12 legislative session to extend or  
          repeal that sunset date.  Accordingly, the "new" Section 9321  
          was repealed on January 1, 2013, 12 years after it first took  
          effect.  

          This urgency bill would reinstate the repealed provisions of  
          Section 9321 with an operative of January 1, 2013, and state the  
                                                                      



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          intent of the Legislature to negate the prior repeal in order  
          ensure economic stability and continuity for purposes of  
          contract interpretation.  The bill would sunset on January 1,  
          2015, unless subsequent legislation is enacted to extend or  
          repeal that date.

                                CHANGES TO EXISTING LAW


          Existing law  provides that a lessee in ordinary course of  
          business takes its leasehold interest free of a security  
          interest in the goods created by the lessor, even if the  
          security interest is perfected and the lessee knows of its  
          existence.  (U. Com. Code Sec. 9321.)  

           This bill  would provide that a licensee in ordinary course of  
          business takes its rights under a nonexclusive license free of a  
          security interest in the general intangible created by the  
          licensor, even if the security interest is perfected and the  
          licensee knows of its existence. 

           This bill  would define "licensee in ordinary course of business"  
          as a person that becomes a licensee of a general intangible in  
          good faith, without knowledge that the license violates the  
          rights of another person in the general intangible, and in the  
          ordinary course from a person in the business of licensing  
          general intangibles of that kind.  The bill would provide that a  
          person becomes a licensee in the ordinary course if the license  
          to the person comports with the usual or customary practices in  
          the kind of business in which the licensor is engaged or with  
          the licensor's own usual or customary practices. 

           This bill  would state the intent of the Legislature to negate  
          the repeal on January 1, 2013, of, and to enhance, existing  
          provisions within Section 9321 of the Uniform Commercial Code  
          relating to a licensee in ordinary course of business in order  
          to ensure economic stability and continuity for purposes of  
          contract interpretation. 

           This bill  would include a January 1, 2015 sunset date for the  
          above added provisions, unless a later enacted statute deletes  
          or extends that date, as specified.  

           This bill  would provide that, operative January 1, 2015, a  
          lessee in ordinary course of business takes its leasehold  
          interest free of a security interest in the goods created by the  
                                                                      



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          lessor, even if the security interest is perfected and the  
          lessee knows of its existence

           This bill  contains an urgency clause and would therefore take  
          effect immediately.
          
                                        COMMENT
           
          1.   Stated need for the bill 

          According to the author, "Section 9321 of the Commercial Code  
          sunset on January 1, 2013.  [ . . . ]  In order to ensure that  
          California's authors, creators and performers have the same  
          protections as other states it is imperative that California  
          reinstates this uniform code with urgency."  

          Co-sponsors of the bill, the Directors Guild of America, Screen  
          Actors Guild-American Federation of Television and Radio  
          Artists, and Writers Guild of America, West add: 

               Section 9321 is important to our three Guilds, as it helps  
               protect our members' financial interest.  It is through the  
               Guilds that writers, performers and directors receive  
               continuing payments, called residuals, which are based on  
               revenue derived from the continuing exploitation of the  
               works they create (e.g., home video, new media and  
               television exploitation).  The Guilds rely on security  
               interests or liens to protect payment of residuals.  If  
               distributors are able to take their licensed rights free of  
               Guild liens, the ability of the Guilds to protect our  
               members' financial interests will be significantly  
               impaired, even when those distributors are contractually  
               responsible for residual payments.  

               [ . . . ] [I]t is critical that California's Commercial  
               Code does not provide lesser protections for authors,  
               creators and performers than exist in other states-this  
               would be especially ironic, given that California is home  
               to the entertainment industry. 

          2. SB 6 seeks to undo the effects of allowing existing law to  
            sunset 

          This bill seeks to re-enact provisions of Section 9321 of the  
          Uniform Commercial Code, which were repealed on January 1, 2013,  
          and to negate the effect of the repeal. Accordingly, the bill  
                                                                      



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          includes an operative date of January 1, 2013, as well as an  
          urgency clause stating that it is necessary for the bill to take  
          immediate effect ". . . to negate the repeal of, and to enhance  
          existing law relating to a licensee in ordinary course of  
          business to ensure economic stability and continuity for  
          purposes of contract interpretation. . . ."  

          As a result, Section 9321 would be restored to read as it has  
          since the adoption of the revised Article 9 well over a decade  
          ago (see Background).  That re-enactment would allow a licensee  
          in ordinary course of business, as specified, to take its rights  
          under a nonexclusive license free of a security interest in the  
          general intangible created by the licensor, even if the security  
          interest is perfected and the licensee knows of its existence.   
          In other words, under this language, when a customer legally  
          purchases a movie from retailer, the customer would receive a  
          nonexclusive license for the movie, and the  
          actors/directors/writers would not be able to go after the  
          consumer to collect on any security interest in the movie  
          itself.

          Committee staff notes that while this is the first time since  
          the enactment of the revised Section 9321 that the sunset has  
          been allowed to lapse, an urgency bill was required in the  
          2009-10 legislative session to extend the sunset to January 1,  
          2013.  This Committee's analysis of AB 224 (Portatino, Ch. 315,  
          Stats. 2009; extending the sunset to January 1, 2013) noted that  
          an urgency clause was required in that bill due to "the  
          sponsor's 'inattention' to seeking an extension of the sunset  
          date earlier in the session . . . ."  (Sen. Judiciary Com.,  
          analysis of AB 224 (2009-2010 Reg. Session), August 26, 2009, p.  
          3.) 

          While staff also notes that any uncertainty that arose after the  
          lapse of Section 9321's sunset date on January 1, 2013 cannot,  
          as a practical matter, be entirely erased, as a matter of public  
          policy, it is arguably preferable to reinstate those provisions  
          immediately to both minimize the effect of any confusion and  
          provide certainty moving forward.  Also, though the sponsors of  
          this bill continue to work with other stakeholders, such as the  
          Motion Picture Association of America, to address their  
          industry-specific interests, all stakeholders appear to agree  
          that it is imperative to reenact these provisions immediately,  
          and with an operative date that will negate the repeal that  
          occurred on January 1, 2013.

                                                                      



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          While this bill would address the more immediate concerns, the  
          provisions would again sunset on January 1, 2015.
          3.    Amendments required to reflect the reduced scope of the  
          bill
           
          The introduced version of SB 6 sought to not only re-enact the  
          provisions of Section 9321 that sunset on January 1, 2013, but  
          to enhance the provisions in a manner that sponsors hoped would  
          address the concerns that their industry has had since the  
          enactment of the revised Section 9321 in 1999.

          Due to concerns raised by other stakeholders, those "enhanced"  
          provisions were struck from the bill so that negotiations may  
          continue without delaying the reenactment of the sunset  
          provisions.  However, both the intent and urgency language still  
          contain references to those enhancements.  Accordingly, the  
          following author's amendments would conform the intent and  
          urgency language to the reduced scope of the bill: 

             Author's Amendment:  

            On page 2, line 3, strike ", and also to enhance,"

            On page 3, line 18, strike ", and to enhance,"
            
           
           Support  :  California Commission on Uniform State Laws; Motion  
          Picture Association of America, Inc. 

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  Directors Guild of America; Screen Actors  
          Guild-American Federation of Television and Radio Artists;  
          Writers Guild of America, West 

           Related Pending Legislation  :  None Known

           Prior Legislation  :

          AB 224 (Portatino, Ch. 315, Stats. 2009), extended the sunset to  
          January 1, 2013. 

          AB 2303 (Judiciary, Ch. 567, Stats. 2006), extended the sunset  
          to January 1, 2010.
                                                                      



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          SB 283 (Sher, Ch. 235, Stats. 2003), extended the sunset to  
          January 1, 2007. 

          SB 45 (Sher, Ch. 991, Stats. 1999), See Background.

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